So inflation finally popped up in the consumer price index this week. And it came in warm, with annual inflation in the US of 5.4%, well above the Federal Reserve’s 2% target. It also marks the highest point in 13 years (FYI – that was 2008, not exactly a great economic year). The kicker? Professional investors didn’t seem to care.
Ten-year Treasury yields, the benchmark for determining the cost of borrowing mortgages and corporate debt in America, initially declined. Expectations of higher inflation and economic growth tend to boost, not dampen, government bond yields. As the 10 years eventually ticked up, the initial reaction was surprising.
This column originally appeared in Crypto long and short, CoinDesk’s weekly newsletter for professional investors.
With the markets in mind, I wanted to use this week’s newsletter to talk about the perceived lack of institutional interest in bitcoin lately. (Hint: Obviously it’s not lacking.) I also wanted to explain why I think the industry is in a position to see another burst of institutional interest in cryptocurrencies as a result of Circle’s upcoming public listing in the UK. fourth quarter of 2021.
Institutions supposedly don’t care about crypto
BlackRock CEO Larry Fink’s Comments on CNBC’s “Squawk Box” made headlines the past week after claiming there was “very little demand” for crypto assets. “In the past you have asked me questions about crypto and bitcoin. Again, in my last two weeks of business travel, not a single question was asked about that,” said Fink.
Admittedly, Fink was referring to retirement investing and how registered investment advisers, pension funds and insurance companies should build portfolios on behalf of their clients over the long term. He did not speak to institutional investment strategies from hedge funds, venture capital firms or large corporations.
So while I don’t think Fink was suggesting that institutional interest in crypto assets in general is small, I do want to stick to the misguided conclusion of his comments that institutions don’t care about crypto. This is something that people have been asking me about since the bitcoin price started falling from its all-time high of $64,888.99, and ever since anecdotal evidence like Fink’s statements started to suggest that smart money is no longer in the crypto space. used to be.
Crypto Direct Investments and VC Funds
We haven’t seen the plethora of companies buying bitcoin to put on their balance sheets in Q2 like we did in Q1. What we have seen instead is that there is a huge amount of capital flowing into crypto companies through venture capital funds or direct investments. There has been more deal activity for blockchain-focused companies in the first half of 2021 than there was throughout 2020. Global VC funding across all sectors has hit record highs so far this year, yet the share of deal activity in crypto and blockchain startups is also increasing, from 0.89% to 5.97% from H2 2020 to H1 2021 .
The timeline below outlines some of the biggest deal activity and fundraisers over the past four months. Venture capital funds also raised record amounts of capital in the past quarter. On June 24, Andreessen Horowitz (a16z) announced that it had created the largest crypto-related fund to date, Raising $2.2 Billion for his Crypto Fund III.
VC investments in crypto companies do not indicate that all types of institutions are deeply interested in crypto at this point. For some, VC bets are looking for 1-out-100 long shots the next Coinbase (so goes the cynic). An upcoming event that I believe will spark wider institutional interest in crypto is the public mention from crypto financial services provider Circle.
On July 8, Circle announced its intention to go public through a merger with Concord Acquisition Corp (NYSE: CND), a special purpose company. It’s harmless because in the grand scheme of capital markets $4.5 billion is peanuts, but the butterfly effects of Circle’s IPO could have far-reaching implications for crypto markets by clarifying US regulations for stablecoins.
The advent of a regulatory compliant stablecoin
A stablecoin is a cryptocurrency that is pegged to the value of a fiat currency. In 2018, Circle, in partnership with cryptocurrency exchange Coinbase, launched a dollar-pegged stablecoin called USDC. USDC is fully supported 1:1 by a controlled reserve and ruled by Centre, a membership-based consortium that sets technical, policy and financial standards for stablecoins. USDC is not the only dollar-pegged stablecoin, but it is one of the largest next to to tie (USDT).
Stablecoins are important for the health of crypto markets because they solve the problem of high volatility and convertibility between fiat and crypto. When banking relationships were tough for crypto exchanges, stablecoins were critical for market growth.
Circle’s IPO could be a critical step in gaining clarity and regulatory adoption around stablecoins in U.S. Circle co-founder Jeremy Allaire said the same when he emphasized on CoinDesk TV that Circle’s intent to go public was to bring “greater reserves of transparency” with auditors and the US Securities and Exchange Commission (SEC). Allaire also said he enjoys working with regulators to “see adjustments to various forms of banking and payment regulations to accommodate some of the nuances and characteristics of stablecoins.”
For context, stablecoin reserve transparency has been a hot-button issue for the dominant dollar-pegged stablecoin, tether, which was launched just a few months ago. settled a legal battle with the New York Attorney General’s office for alleged attempts to cover up the loss of $850 million in client and company funds.
USDT is a pain point for institutional investors. Investors don’t like to fall out of favor with lawmakers and they don’t like to lose money. The lack of transparency to USDT represented the possibility of both things happening; possibly to the same catalytic converter (imagine the chain going to zero).
If USDC continues to rise in market cap to surpass the tether while becoming a regulatory-compliant stablecoin, it could open the door for institutional investors who once feared the regulatory risk of cryptocurrencies, particularly when it comes to trading and crypto-off. -ramps .